Yet Brazil was one of the investment darlings of the last decade — the “B” in the ballyhooed BRIC quartet that also included Russia, India and China. Brazil’s economy at times grew at a rate of more than 5 percent a year. Most years, its stock market rose by double digits — in 2009, it returned more than 100 percent. Millions of people moved from poverty into the middle class, and Brazilian companies, like the oil driller Petrobras and the mining concern Vale, attained international prominence.

So far this decade, though, the Brazilian stock market has been a bust. It has dropped by a cumulative 25.3 percent over the last three years, and it has dragged Latin America stock mutual funds down with it. In the first half of 2013, Latin America funds tracked by Morningstar lost almost 17 percent, on average. Over the last three years through June, they lost 4.6 percent a year, annualized. But over the much longer term, they have still fared the best among emerging-market regional funds tracked by Morningstar, returning 16.7 percent, annualized, over the last decade.

“Brazil needs to grow,” said Will Landers, manager of the BlackRock Latin America fund. “It has to deliver a G.D.P. growth rate above 2.5 percent, or investors are going to stay away.” Growth sagged in 2012, with gross domestic product increasing less than 1 percent.

As the bellwether for South American bourses, Brazil has had problems that affect investors in the entire region. Brazilian stocks account for nearly 60 percent of the MSCI Emerging Markets Latin America index and thus the same amount of passively managed funds, like the iShares MSCI Emerging Markets Latin America exchange-traded fund, that track the index. “You’re going to be investing in Brazil if you run a Latin America fund,” said Andres Calderon, manager of the Natixis Hansberger Emerging Latin America fund. Brazilian stocks recently made up about two-thirds of the assets of both Mr. Calderon’s and Mr. Landers’s funds.

Add in Mexico, the region’s other big economy, and Latin America funds can end up looking like concentrated bets on a couple of countries. Mexican companies recently accounted for 25 percent of the MSCI index, 22 percent of the BlackRock fund’s assets and 22 percent of the Natixis fund’s assets. The remaining countries in the MSCI index are Chile, Colombia and Peru.

Actively managed funds can typically hunt more broadly for investments than in just those five countries. BlackRock’s fund, for example, recently held shares of Copa Airlines in Panama.

But the relatively small size of economies and stock markets in Chile, Colombia and Peru can prevent them from adding much oomph to big portfolios. With a G.D.P. of about $250 billion, Chile’s economy is roughly equal to Minnesota’s, while Peru’s is akin to Oregon’s.

Still, portfolio managers see promise in this trio, particularly Peru. “Peru is the highest-growth country in Latin America,” said Luis Carrillo, lead manager of the J.P. Morgan Latin America fund. “It’s growing at Chinese rates — 7 to 8 percent annual G.D.P. growth for six or seven years. The government has learned that growth is the best way to bring people out of poverty.”

Peru’s stock market remains nascent, without the diversity of companies typical of a mature market. “So far, it’s made up mainly of mining and metals companies, so it’s more of a play on commodities,” said Luiz Ribeiro, São Paulo-based manager of the DWS Latin America Equity fund. But domestic consumption is growing, and that should soon yield the kinds of consumer companies that Mr. Ribeiro and other managers say represent the future for stock investing in Latin America.

Managers of Latin America funds often caution that the region and its markets, for all of their promise, remain volatile — as recent events in Brazil have shown.

Thus Adam J. Kutas, manager of the Fidelity Latin America fund, suggests a fund like his should account for no more than 5 percent to 10 percent of a typical diversified portfolio. “These are markets that are earlier in their growth phase than the U.S. or Europe,” Mr. Kutas said. “They can add a lot of enhanced return, but you have to be comfortable with the risk.”

Some commentators recommend even greater conservatism. David Snowball, publisher of the Mutual Fund Observer, an online newsletter, said that most retail investors might be better off staying away from any fund aimed at a single emerging region. “You want to invest where you have a comparative advantage — better contacts or better information,” he said. Most retail investors have neither the contacts nor the expertise to determine whether they should overweight Latin American stocks as compared with, say, those of Asia or Eastern Europe, he said. Instead, he advised, they should stick with broadly diversified offerings.

Mr. Kutas took a different view, noting that a growing number of people in the United States do have firsthand Latin America knowledge. Many have roots and family in the region, travel there regularly and speak Spanish or Portuguese.

“If you do have a personal connection, that can help you understand the risk you’re taking on,” he said. “And if you want to invest in the region you come from or participate in the opportunities you see there, a Latin America fund is one way to do it.”

Article source: http://www.nytimes.com/2013/07/07/business/mutfund/in-brazil-a-reminder-of-emerging-market-risks.html?partner=rss&emc=rss